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Received CP49 Notice from IRS - Retirement Distribution Reporting Error from Previous Year
So back in 2019 I finished grad school and had to relocate for my first real job making about 46K annually. I was pretty broke at the time and needed to cover moving expenses plus put a down payment on a car, so I made the questionable decision to cash out part of my retirement account - around 20K in total. Fast forward to tax time, and I completely messed up when entering the numbers. I accidentally put $2,000 instead of $20,000 for the retirement distribution. Well, I just got slapped with a CP49 notice from the IRS saying I underpaid my 2019 taxes by $8,465.75. Looking at the numbers, my total income for 2019 ended up being about 66K - with 46K from my job and 20K from the retirement withdrawal. I had paid roughly 7.5K in taxes throughout the year but got a refund of around 4K because of my error with the retirement distribution. I understand I definitely screwed up and owe back taxes, but almost $8,500 seems excessive to me. By my rough calculations: Total Income = $66,000 minus standard deduction ($12,200) and personal exemption = $53,800 Tax liability should be around $7,200 plus the percentage on income above thresholds, with an education credit of $1,000. I paid approximately $3,500 in taxes. Does anyone know the best approach to challenge this? Should I hire a professional tax person or can I reasonably handle this myself with the IRS?
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Should my father have income tax withheld from his pension after my mom's passing?
I'm in the process of helping my dad with some paperwork after my mom passed away a few months ago. Her pension is being transferred to him since he was listed as the contingent annuitant on their account. The retirement services company sent us a W-4P form (the 2021 version) to complete, and I'm really confused about whether he should have federal income tax withheld from these pension payments. Dad is 73 and still receives his own Social Security, and now he'll be getting mom's pension too (about $1,600 monthly). He doesn't have any other sources of income. I called the company to ask why they sent the 2021 form instead of a newer one, and they just said that's what they're currently using. But now I'm worried about the bigger question of withholding. If he doesn't withhold enough, will he get hit with a penalty next April? But if he withholds too much, it cuts into money he needs for monthly expenses. Has anyone dealt with this situation before? Should he have taxes withheld, and if so, how much is reasonable? Thanks in advance for any advice!
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Just want to add something important no one has mentioned yet. Your father should also consider how his Required Minimum Distribution (RMD) might factor into this if he has any traditional IRAs or 401ks. At 73, he's required to take those distributions which adds to his taxable income. Also, if he doesn't want to have withholding taken from the pension directly, he could make quarterly estimated tax payments instead. Some people prefer this method because it gives them more control over the timing of payments.
Thank you for mentioning this! I completely forgot about his IRA. He does have a small one with about $42,000 in it. I guess that means he'll need to take distributions from that too? Does that change how much he should withhold from the pension?
Yes, at 73 he definitely needs to take required minimum distributions (RMDs) from his IRA. For his age, it's roughly 4% of the balance, so that's about $1,680 for the year based on the $42,000 balance you mentioned. This additional income should factor into his total tax picture. While it's not a huge amount, it does push his total income higher. I would probably increase the pension withholding slightly to account for this - maybe closer to 15-18% rather than the 12-15% others suggested. Alternatively, he could have taxes withheld directly from the IRA distributions when they're taken, which many people find simpler.
Careful with that W-4P form! The 2021 version is different from newer versions. On the 2021 form, if you don't want any additional withholding beyond the standard calculation, you should check the box in Step 1c that says "I do not want any federal income tax withheld from my pension." This seems contradictory, but it's actually correct! If you DO want additional withholding beyond the standard amount, then don't check that box and fill out the other sections instead.
No, that's not right. If you check that box, they won't withhold ANY taxes. That's definitely not what OP's father wants based on his situation.
You're right, I should have been clearer. Checking that box means NO withholding at all. I was thinking of a different scenario. For OP's father, he should NOT check that box, and instead complete Step 2 to indicate his filing status and Step 4c to specify any additional withholding he wants beyond the standard calculation. Most pension administrators will calculate a base withholding amount, and Step 4c lets you add more if needed. Thanks for the correction!
How to Report Capital Gains/Losses from NFT Trading on Taxes?
So I completely dropped the ball and left my taxes until the last minute of my extension period. In 2022, I went pretty deep into NFTs and ended up with a net loss overall. I've been tempted to just skip reporting them altogether, but I know that's probably asking for trouble down the road. I traded around 1,500 different NFTs last year and I'm panicking about how to properly report this on my taxes. From what I understand: - I need to use Form 8949 for these capital gains/losses, but do I seriously have to list EVERY single NFT transaction individually? That's going to be hundreds of entries! - I'm also confused about how to handle pack openings. For example, if I bought a pack for $400 and got 3 NFTs that I later sold, how do I report that? Should I report the pack as disposed of for $0 (so a $400 loss), then list each NFT as acquired at $0 and sold at whatever price I got? Or should I split the $400 pack cost between the 3 NFTs somehow? Any help would be really appreciated. I know I shouldn't have waited this long but here I am 😬
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I just went through this same nightmare with about 700 NFT transactions. If you're in a time crunch, another approach is to use the summary method on Form 8949. Basically, instead of listing each transaction separately, you can attach a statement that summarizes transactions of the same type. You'd want to group them by short-term vs long-term, and by whether they were reported on a 1099-B. Then you can just put "See attached statement" on Form 8949 and include the totals from your detailed list. Remember though - you still need to maintain records of every individual transaction in case of an audit. The summary is just for filing purposes.
Thanks for this advice! Can you clarify what "same type" means in this context? Like could I group all my NBA TopShot NFTs together even if purchased/sold on different dates? Or does "same type" mean they need to have the same dates and cost basis percentage?
By "same type," the IRS generally means transactions that share the same characteristics for tax purposes. Grouping should maintain separate categories for: short-term vs long-term holdings (more/less than 1 year), whether they were reported on a 1099-B, and whether you have any adjustments to the basis or proceeds. You couldn't group all NBA TopShot NFTs together just because they're from the same platform if they have different holding periods or acquisition dates. The summary should still separate short-term from long-term gains and maintain the integrity of your actual tax position. The goal is to simplify the paperwork while still accurately reporting your total capital gains and losses. Your detailed transaction records should include the specific dates, cost basis, and sale price for each NFT in case you're ever asked to substantiate your summary.
I'm going through this exact NFT tax hell right now. One option nobody's mentioned is using Like-Kind Exchange rules. Before 2018, some crypto traders used Section 1031 to defer taxes on crypto-to-crypto trades. Although the Tax Cuts and Jobs Act limited 1031 exchanges to real estate after 2017, I've heard some tax pros argue NFT-to-NFT trades might qualify as collectibles exchanges rather than digital asset trades. Has anyone tried this approach? Seems like it could simplify reporting enormously.
This is actually incorrect and potentially dangerous advice. The IRS has been very clear that Like-Kind Exchange treatment (Section 1031) does NOT apply to cryptocurrency or NFT transactions after 2017. This position has been stated multiple times in IRS guidance. Every NFT trade is considered a taxable event - when you trade one NFT for another, you're technically selling the first one for its fair market value and using those proceeds to buy the second one. Both transactions need to be reported. Trying to claim NFTs as collectibles for Like-Kind treatment would likely trigger an audit and potentially penalties for incorrect filing. NFTs are treated as digital assets under current IRS guidance.
Should I switch from CPA to Tax Attorney for my S-Corp? Which gives better tax advantages?
I run an S-Corp that's been growing steadily over the last few years. Right now I use a CPA for all my business tax stuff, but I've been wondering if I should consider switching to a tax attorney instead. My main question is whether tax attorneys stay more up-to-date with changing tax laws compared to CPAs? The business has gotten more complex and I want to make sure I'm capturing all possible tax advantages that are available to me as an S-Corp owner. I've heard mixed things about both professionals - some say CPAs are better for day-to-day tax planning while attorneys are better for specific legal issues. But honestly, I'm just looking for whoever can legitimately minimize my tax burden while keeping me fully compliant. My current CPA is fine but I sometimes wonder if I'm missing opportunities. I know that CPAs can vary widely in how aggressive/knowledgeable they are with deductions and planning. For those who have experience with both, which professional do you think provides more value for an S-Corp owner? And does hiring a tax attorney instead of a CPA make sense for ongoing tax planning or only for specific situations?
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One thing nobody's mentioned yet is that having an S-Corp adds a whole layer of complexity beyond just regular business taxes. I learned this the hard way. I started with a regular tax preparer, got audited, switched to a CPA, and still had issues with how my self-employment income vs S-Corp distributions were being handled. Only when I finally consulted with a tax attorney did I learn that my operating agreement had serious flaws that were causing tax problems. For me, the ideal setup has been using a tax attorney to set up the proper legal structure and documentation, then having a CPA handle the regular filings and planning. The attorney costs more but only needed occasional consultation, while the CPA handles the ongoing work.
What specifically did the tax attorney find wrong with your operating agreement? I'm wondering if I should have mine reviewed now.
Honestly depends on your asset size. If your company is making under $1M annually, a good CPA is more than enough. As you grow beyond that, especially if you're acquiring other businesses or have complicated ownership structures, a tax attorney becomes more valuable. Starting with a highly qualified CPA with S-Corp specialization is the most cost-effective approach. If they start saying things like "this is beyond my expertise" or "you might want a legal opinion on this," that's when you bring in a tax attorney for those specific issues. Don't waste money on attorney fees for routine matters a CPA can handle perfectly well. Just make sure you have a CPA who primarily works with businesses, not one who mostly does individual returns and occasionally handles business clients.
Clarification on Failure to File Penalty for late 2022 tax return with Schedule C income
I'm hoping someone can help clarify a situation I'm dealing with. I prepared my brother-in-law's 2022 tax return and we're facing some penalty issues. He has a fairly successful side business (reported on Schedule C) that generated about $38,000 in profit, which obviously created a significant tax liability. I told him he should at least pay something with his extension to minimize penalties, but he completely dropped the ball. He didn't file the extension by April 15, 2023, and instead sent it in around June 10, 2023. Now we're trying to figure out exactly what penalties he's facing. From what I understand, there's a Failure to File penalty that gets calculated, but I'm confused about how it works since he did eventually submit the extension, just not by the original deadline. Does the penalty stop accruing once you file the extension even if it's late? Or does it continue until the actual return is filed? Any insights would be greatly appreciated! We're trying to figure out exactly what he owes so he can budget for it.
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Just a pro tip on the Failure to File penalty - if your brother-in-law has a clean tax history for the past 3 years (filed and paid on time), he might qualify for First Time Penalty Abatement. The IRS doesn't advertise this much, but it's an administrative waiver they can grant. I had a similar situation in 2020 where I completely missed the filing deadline because of some family emergencies. Called the IRS, explained my situation, mentioned I had a clean record for the previous years, and they removed about $1,200 in penalties on the spot. Definitely worth asking about!
Does this work if you were late two years in a row? I was late filing in 2021 and 2022, but was always on time before that.
Unfortunately, it probably won't work for consecutive years. First Time Penalty Abatement typically requires a clean compliance history for the three tax years prior to the year you're requesting abatement for. Since you were late in 2021, you likely wouldn't qualify for abatement of the 2022 penalties. However, you might have qualified for abatement of the 2021 penalties if you were compliant for 2018-2020. If you haven't already requested that, it might be worth exploring. For 2022, you'd need to look at other grounds for abatement like reasonable cause (serious illness, natural disaster, etc.) rather than the first-time administrative waiver.
One important clarification - the Failure to File penalty is calculated as 5% per month of the UNPAID tax. If he paid most of what he owed and only had a small balance due, the penalties would be much smaller than if he paid nothing. For example, if he owed $10,000 but paid $9,000 with his late extension, the 5% penalty would only apply to the remaining $1,000 (so $50 per month rather than $500 per month if he paid nothing).
Thank you!! This makes a huge difference for my situation - I've been panicking about potentially owing thousands in penalties, but I did pay about 80% of my taxes on time, just filed late. This means my penalties should be WAY lower than I was calculating.
Jade Lopez
One thing to consider - if you used that retirement money for qualified education expenses, you might be exempt from the 10% early withdrawal penalty. Since you mentioned graduating college, it's possible some of the funds went toward that? When I took an early distribution from my IRA for my last semester, I still had to pay income tax on it, but I avoided the 10% penalty by filing Form 5329 and indicating the qualified education exception.
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Alice Coleman
AuthorThat's really interesting - I didn't realize education expenses could qualify for avoiding the penalty. About $6,000 of what I withdrew actually did go toward my final tuition payment. Would I need to file an amended return to claim this exception, or can I just dispute the CP49 notice directly?
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Jade Lopez
You can address it directly in your response to the CP49 notice. You'll need to complete Form 5329 for the tax year in question, entering the distribution amount on line 1, then the amount used for qualified education expenses on line 2 of the "Exceptions" section. I'd also include proof of payment to your educational institution from that year. The IRS will recalculate your liability based on this information. Since it's been a few years, gather as much documentation as possible - receipts, account statements, anything showing you used those funds for education.
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Tony Brooks
Did you check to see if any taxes were already withheld from the distribution? Usually retirement plan administrators automatically withhold 20% for federal taxes when you take early distributions. If they did that, it should be credited against what you owe.
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Ella rollingthunder87
This is a really important point. When I cashed out part of my 401k years ago, they automatically withheld 20%. It should show on your 1099-R in Box 4. If withholding happened but wasn't accounted for in your original return, that could significantly reduce what you owe.
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